26.8.04

By chance, the closing last week of the auction for Google's initial public offering coincided almost exactly with the fourth anniversary of the closing of Germany's mobile phone licence auction. The corporate value destruction as Europe's telecommunications operators scrambled for the right to offer third-generation services was on a scale rarely seen in business history.

But what goes around comes around. It was in 2008, I think, that the rumour that the moon was made of blue cheese began to circulate. Most people were initially sceptical. It was not, however, the sceptics who started buying the cheese distribution sector, which strongly outperformed the market. When the chief executive of a cheese business said he would wait before investing in rocket technology, his company's market capitalisation fell 10 per cent in a week. The call to spend more time with his family came soon afterwards.

The lesson was not lost on other executives. Only the crotchety boss and dominant shareholder of Bouygues Cheese continued to say it was all nonsense. Big consulting firms established practices to advise food companies on the challenges of change. There were few fees to be earned from telling clients not to be stupid. Conferences entitled "Space the New Frontier for Food" were held almost weekly. They were addressed by consultants and ambitious company men and women, early believers who had earned promotion through their prescience. Investment banks urged the logic of restructuring. If the merger of New Zealand Dairies with Glasgow Buses looked far-fetched to some, the architects of the deal pointed out there were few big transport companies left to buy. Journalists applauded these visionaries. They understood "Moon made of cheese" was a front-page story: "Moon not made of cheese" was spiked. Grocer's Weekly adopted the subtitle "The Magazine of the Space Age". Only the crustiest columnists dared demur.

Investment managers were reluctant supporters. They had seen bubbles before. But they were obliged to report to clients that underweight positions in cheese had led to underperformance. Views shifted. Perhaps funds should be entrusted to younger managers, with minds unclouded by experience. As fund managers scrambled to increase their market exposure, shares in cheese distribution rose towards the moon and the sky.

Excitement mounted as the day for the launch of the first exploratory rocket approached. The space agency was auctioning the five seats on board and competition was intense. None of the four established cheese companies could be left out and many other businesses were clamouring for a seat.

The auction raised far more than anyone had imagined. Its sophisticated designers made only one mistake. They assumed participants had some faint understanding of what they were doing. Manchego, the Spanish cheese maker, was a particularly aggressive bidder. As one of its executives explained, it was essential to be a lunar player. If you were not aboard, your stock would fall by more than the cost of the seat. Even if you were yourself thinking rationally and mostly you were not you were in the hands of people who were not doing so or could not act on rational beliefs. "What else could we do?" said the chief executive of Lodacheese, whose career was based on the insight that you won auctions by paying more than anyone else.

A multinational crew climbed aboard the rocket to general applause. What happened next is a mystery. Perhaps it blew up before it reached its destination, perhaps it missed the moon and is off to distant space. At any rate, the astronauts were never heard of again. Nor was the myth that the moon is made of blue cheese.

Half way through this fairy tale I realised it had already been written. By Hans Christian Andersen; whose Emperor's New Clothes explained how vanity and greed can promote large-scale self-delusion. Andersen's only error was to exaggerate the effect of one small boy's voice among the brayings of the self-opinionated and self-interested. His emperor continued to wave to the crowds even after he realised they knew he was naked. Great men surrounded by adulation rarely perceive themselves to be wrong, do not often learn from experience other than their own and never listen to small boys. That is why history so often repeats itself.